This paper is an outcome of  The Energy Research Institute's (TERI’s) study for the Ministry of Urban Development (MoUD) under the Ministry’s Centre of Excellence (COE) to “Review the existing guidelines of determination of user charges for water and sanitation services and to incorporate economic principles of pricing in urban water supply sector in India”.

The main objective was to draw from review of present practices, key bottlenecks, and then prepare guidelines for setting price for urban water by addressing these bottlenecks keeping in mind economic principles for tariff setting. The recommendations are based on study of existing scenarios across various Indian states, lessons drawn from review of international case studies and pricing reforms in electricity sector in India.

Some of the recommendations on incorporating economic principles of pricing are -

• A state level water tariff policy should be notified detailing guiding tariff principles and approaches to achieve economic pricing in water sector. The policy should provide guidelines which can be applied by the city specific ULBs as per local conditions. They should have the power to modify guidelines for setting prices as per their ground realities.
• Setting up an independent regulatory body would ensure efficiency and transparency in the tariff setting process.
• Given the negative impacts of underpricing of water on financial sustainability of utility, quality of supply and efficient use of water, it is recommended to formulate an appropriate pricing strategy.
• Tariff philosophy should be based on economic principles of pricing namely revenue sufficiency, economic efficiency, equity and fairness.
• Various alternative tariff models exists namely non-volumetric flat rates, volumetric charges or IBT structures. Of these available tariff models, IBT structure seems most appropriate for domestic users; while uniform volumetric charges can be determined for other categories.
• A two part tariff structure consisting of a demand charge and variable charge, like in electricity sector is recommended.
• In short run, pricing strategy should adopt uniform tariff across state from implementation point of view, while in long run, flexibility in having ULB specific tariff can be permitted within an overall range.